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'Plenty more to do' at RSA, says Berenberg

Berenberg has trimmed its target price for RSA Insurance from 112p to 92.6p and kept a 'hold' rating, saying there is plenty more to do in the company's turnaround.

New Chief Executive Stephen Hester, the former RBS boss who joined the insurance in February, has "made a promising start", Berenberg said.

"The group's plans for structural simplification though disposals make sense to us, and the announced £775m rights issue is simply the price of retaining its best operations," the broker said.

Berenberg pointed out that the "relatively weak" UK business is set to be restructured which is likely to lead to volume reductions and aggressive cost cutting. "However, due to the commercial lines bias of this operation, it may not be straightforward to improve profitability."

Meanwhile, the broker said while the company has improved its balance sheet, its strength still trails that of its peers.

"Perhaps the best option for RSA is to reallocate capital from the UK to more attractive regions. This can partly be achieved by reducing UK volumes, but the group also needs to find a better solution to its UK legacy liabilities, which account for about one-third of capital allocated to the region. Options are available for this, but these are likely expensive."

Berenberg has lowered its operating earnings forecasts for 2014 and 2015 by 4.4% and 9.5%, respectively, "to reflect weaker-than-expected investment income and premium guidance" as per the company's annual results published last month.

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